In the weeks since I resigned from IBM, I’ve been trying to organize my thoughts on the future of the company. A few recent developments have helped crystallize the points I want to make: first, there’s been a spate of high-level departures from the company, some public (1, 2) and many others which I’ve just heard about through the grapevine. Second, rumors about a major reorganization have surfaced in the tech press, reflecting widespread rumblings within IBM itself. These developments are related, but are only properly understood with a clear picture of what’s going on at IBM as a whole.

The Computing Tabulating Recording Company.

IBM is a company in transition – both by choice and not. Its sprawling size, century-old legacy and multitudes of business lines make this transition noisy, messy and very public. Changing strategies for IBM involves breaking a lot of conceptual models that a lot of people have held about the company for many years, perhaps no where more so than in the financial community. This is one of the reasons why much the mainstream coverage of IBM is highly simplistic, ill-informed, or flat-out wrong. (Indeed, that could describe a lot of what finance people write about tech.)

I remain a true believer in IBM. I have faith that the company will find its way again, and that IBM will still be selling to our grandchildren one day. But in the meantime, there’s a lot of soul-searching to be done. In the last several months (and particularly since the crappy Q3 results were released), there’s been something of a dogpile of criticism of the company, much of which is unfair. So here I’m going to try to offer some more thoughtful criticism on how the company can find its way again.

Edit, 11/23: I’ve added an update since the Q4/FY 2014 results were announced.

IBM is not just a company

To really understand IBM, there are a few things you must step back and appreciate first.

For one, it’s important to understand that IBM does not really think of itself as just another technology company. IBM is not HP or Oracle or SAP, just older and bigger. It may compete against tech companies – the oldest of which were founded in the second or third generation of the company’s existence – but IBM very much sees itself is an institution apart. Generations of IBMers have grown up inside the organization, and adapted it to meet the needs of their time. I personally know several second-generation IBMers, and even a few third-generation.

Not only invented at IBM, but also here in the Research Triangle Park of North Carolina.

IBM’s longevity and contributions to the history of technology give it a powerful sense of being a company of progress. After all, it is not an exaggeration to say that IBM is responsible for much of modern computing as we know it today, not to mention many aspects of modern life itself: the ATM, the magnetic strip, bar codes, hard disk drives, SQL, and much more. Among too many awards to count, IBMers have won five Nobel Prizes. It maintains the largest pure mathematics department in private industry. IBM cultivates a very tangible sense of its own legacy and history, which is an absolutely inextricable part of the company’s identity.

The sense of legacy that comes with working at IBM is a powerful motivator. This is something that is hard for most outsiders to truly grasp – even today, most IBMers are proud of IBM, while simultaneously disliking other parts of working there. Both pride and intense frustration, even outrage, are topics that the rank-and-file discuss privately all the time, even in the hushed and hallowed hallways of Armonk, which are festooned with museum-like artifacts of IBM’s own history: multiplying card punch machines, Selectric typewriters, even meat slicers.

(It’s corporate propaganda, of course, but masterful even so. Worth a watch.)

The other thing that most pundits on IBM don’t appreciate is just how complex an organization it is. This is a company with nearly half a million employees. That’s around 50% more than HP or Accenture, or an order of magnitude more people than work at Google or Apple. IBM’s divisions themselves are sprawling corporate empires: nearly 200,000 people just in Global Services, the consulting arm; a $26 billion software business, which alone is the world’s third or fourth largest software company (depending on which source you consider); business done in over 170 countries. It’s easy to understand why the leadership can sometimes seem to manage with a meat cleaver rather than a scalpel – it’s hard for anyone to really keep track of everything that’s going on – let alone IBM itself.

There’s a joke in the company that if Ginni just wanted to buy every IBMer a cup of Starbucks coffee, it would cost a million dollars. The funny part is that it’s true. (Well, and that none of the coffee is free at IBM.)

Who does IBM work for?

There was a moment a few months ago that neatly encapsulated a key difference between IBM and one of its much sexier (and profitable) counterparts in the technology industry, Apple.

During an annual shareholder meeting, an ornery representative of a conservative activist investor group pressed Tim Cook (also an ex-IBMer, I should add) to justify some of Apple’s environmental initiatives by their return on investment. Cook’s angry response, which became widely lauded thereafter: “If you want me to do things only for ROI reasons, you should get out of this stock.”

Of course, Apple is in a very different financial position than IBM today, which gives their chief executive a certain degree of latitude; but in my wildest dreams, I nevertheless cannot imagine an IBM executive ever saying something similar, which indicates a fundamental difference between these companies in which stakeholders really hold power.

Indeed, at the very same time that Cook was standing up for the values of his company, the IBM leadership was still pitching the “2015 Roadmap” to Wall Street, which committed the company to an arbitrary EPS target of $20 per share set five years ago by the previous CEO (Sam). In pursuit thereof, IBM has gone through wave after wave of punishing, and deeply demoralizing, layoffs, restructuring, divestments, tricky financial engineering (DYK: IBM invented the interest rate swap!) and egregious (and sometimes downright petty) cost-cutting that has boosted EPS at the expense of employees and, some say, clients.

Any business, and particularly in technology, lives and dies by delivering value to clients and delighting them. But it’s shareholders who actually receive the lion’s share of attention at IBM. (This view, again, shared widely within the rank-and-file.) As with any organization, this focus is evident in where the resources go: since 2010, the company has sunk nearly $35 billion into share repurchases, a figure that’s on track to hit Sam’s goal of $50 billion in repurchases by 2015. The company is now spending more on dividend payments (paid out every consecutive quarter since 1916) than capital expenditures, while its spending on R&D as a percentage of revenue is less than half that of companies like SAP, Microsoft, Google, Oracle, Amazon or Cisco. The company is also taking on more debt to finance share repurchases, and paying more to borrow, while also getting rid of personnel, under-investing in infrastructure and skimping on product development.

While there are good corporate governance reasons for some of this, it’s also clear that most of it is done to appease the investor base. It’s certainly not done to serve clients per se, or to make IBM a stronger, more capable company. Charitably speaking, most of the investors demanding such sacrifices are not technology industry experts. Most of them don’t really know much about IBM’s businesses (see the point about complexity above) and lack the imagination to think about what else could be possible.

Consider who represents those investors to the company: of IBM’s 14 board members, only three are under 60 years old, and two of those were just appointed in 2014. Arguably only two board members – Ginni herself and Dr. Shirley Jackson of RPI – are true technologists (though there are a few other trained engineers in other fields on the board too). You have to wonder whether this is really the right group to chart ambitious new directions for the enterprise technology of the future.

Indeed, what the legacy investor base understands is the traditional IBM model of selling massive hardware/software installs to big companies with long-term services contracts attached – which was a pretty cozy, predictable and safe business, while it lasted. That model has been crumbling for years, but like so many victims of disruption, IBM’s investors – and much of its leadership – has a hard time letting go of it, preferring to keep their heads in the sand for as long as possible.

Jeff Bezos claims that he spends a total of six hours per year talking to investors. Whether that’s really true or not, few can deny that Amazon is building truly transformative technology for the world. The same is true at Apple, Salesforce, Google and any number of other major tech companies. Can IBM say the same? I’m not sure.

Swing for the fences

In 1964, IBM made a $5 billion bet – an unheard-of amount of money at the time, about $38 billion in 2015 dollars – on a bold, and highly uncertain, vision for the future of computing called the System/360. It introduced the concept of compatibility between different computers, which threatened to utterly decimate existing IBM product lines if successful. It is still one of the largest privately-financed R&D efforts of all-time. After launching, the System/360 quickly became tremendously successful. It became so dominant as a mainframe industry standard that today’s System z is a direct descendant.

Could the IBM of 2015 repeat such a bold leap? I don’t know. Watson has been the company’s answer to challenges to its technology leadership in the last several years, and the supercomputer is indeed an impressive feat of engineering. But four years after Watson won “Jeopardy!”, the company is still struggling mightily to generate significant business from it, let alone the $10 billion Ginni has stated as its goal (though we still have a few years to go). Last year, Manoj Saxena, the GM of the Watson group, departed the company to join a Silicon Valley venture fund.

The fastest-growing, most profitable and (arguably) transformative companies in tech today are not those that identified a fast-growing segment and decided to enter it through an acquisition. They are innovators who created entirely new markets by introducing categories of technology, which they then dominated. Google with search, and then consumer internet applications; Salesforce with enterprise cloud computing; Amazon with ecommerce; Facebook with social networking; Apple with mobile devices; and so forth.

While many (not all) of these companies pale in comparison to IBM in terms of revenue today, which company would you really rather be?

Growing a $100 billion company even incrementally means adding billion-dollar businesses each year – hardly a trivial project. But it is possible. Apple is doing it. Google is hard at work doing the same, making major investments to tackle driverless cars, global connectivity, disrupting telecommunications, investing in growing companies, and even attacking IBM’s own turf in enterprise productivity. They do these things because of the potential for transformative technologies to turn into big business opportunities, but also because they’re trying to discover the Next Big Thing before the other guys do.

Is IBM? Well, no. In my view, IBM does not simply need to do Watson better – rather, it needs ten more Watsons. To lead, and live up to Ginni’s laudable vision of IBM as the world’s most essential company, IBM must once again take on the big, hairy challenges like those that made it great. The company should lay claim to leadership in potentially world-changing technologies again, like transportation, drones, clean energy, or IoT. How could it change – dare I say disrupt – whole industries that are desperately in need of disruption, like healthcare, education, the public sector or telecommunications?

Could the IBM of 2015 even still do any of that? Does it still have the vision, technical depth, organization and ability to lure key people that it would need for such grand challenges? Retooling the organization for the innovation needed to lead would require a lot of change, some of it deeply painful. And it would involve deeply troubling conservative investors who neither understand nor care to be involved with innovation-based companies.

Doing what must be done

Do I have a ten-point plan for IBM’s transformation? No. But I have a few ideas on where to start.

The company should halt the share buyback program and hold dividend levels where they are, and redirect that capital (in part) towards buyouts and severance of redundant personnel.

IBM needs to be a smaller company. Spinning out or divesting of non-essential business lines should be a priority – as Ginni has wisely done.

The company’s rumored reorganization plans are a good first step for aligning division interests with desired strategic competencies of the company, rather than the fiefdoms they currently are. But that transformation is going to be very, very messy.

Stop acquiring companies to buy their revenue. Acquire inimitable technologies or patents where necessary, but recommit to in-house development as a primary strategy. IBM is not attracting the top engineering talent in the world today, and to do so, it needs to offer big new challenges to work on.

To that end, identify moonshot projects. Recruit highly visible and competent personnel – inside and out of the company – to lead and work on them, and resource them appropriately. Drastically improve the commercialization of R&D coming out of IBM Research.

IBMers need modern tools to work. That means junking Lotus Notes (which is an embarrassment to the brand) and upgrading to modern, more usable software across the enterprise. Where IBM’s own products aren’t the best, consider whether they should be sold at all.

Knowledge workers are not fungible. The company should invest in, frankly, making working at IBM less of a chore. Useful employee services, amenities, bonuses, and benefits would be a good place to start.

Scrap the PBC stack-ranking system. It is an awful way to grade employees that inevitably skews incentives for staff and managers alike. Maybe follow Microsoft’s example.

Reinvest in marketing. “Made with IBM” is a great start – let’s see more of that.

These won’t do the trick overnight, of course. But they’re some places to start. Any IBM leader who tried to do them would encounter fierce resistance – from the IBM “deep state,” from the investors, even from some clients. But I think that, together, they would position IBM for success in the future.

Update, 11/23: This week, IBM announced another very difficult quarter and annual results. Not only was revenue down 12% YoY, but even after adjusting for the sale of some business lines this year, revenue still declined by several points, missing even tepid analyst estimates.

The most worrisome news, I think, was the year-on-year declines in every single business segment: GBS, GTS and Software (never mind hardware, whose 39% drop was mostly due to the divestments). And when you look a level deeper, the story actually gets worse. These declines were broadly felt throughout each division: every single segment in GTS/GBS was down. Every software segment but one (Rational) was down. Free cash flow is down.

There were some promising signs in these results too – cloud, mobile and business analytics revenue were all up. Yet those are comparatively small businesses within IBM’s Software Group, and so boasting about 300% growth for “Mobile” (and what is that, exactly?) sounds a bit like cherry picking. The fact remains that the core businesses are now settling into a decline from which they are unlikely to emerge. If IBM is to build its future on strategic initiatives like cloud, mobile, analytics and security, they will need to invest much more heavily in those technologies – and probably transform how the company operates.

I often disagree with his analysis, but just this once, Robert Cringely is on point with his recent piece on IBM’s broken sales approach. In particular, he puts into context IBM’s announcements of big enterprise deals like those with Lufthansa and (very recently) Anthem. While these are certainly big contracts and valuable wins for the company, IBM is losing Lufthansa and Anthem-sized deals at a much faster rate than it’s winning them. Time will tell if the impending reorganization – which is rumored to launch next week – will help matters any.